The Panama Papers Revelations Hit The World's Poor Hardest

04/08/2016 11:36 EDT
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Updated
04/09/2017 05:12 EDT

Grace Aloyo, with one of her five children, in Lamwo District, Uganda. The Panama Papers highlighted how just one company in Uganda used Mossack Fonseca services to try to avoid paying $400 million in tax. This is more than the Ugandan government spends on healthcare each year.

Photo by: Julius Ceaser Kasujja/Oxfam

Written by Deborah Hardoon, Oxfam's Deputy Head of Research

This week the Panama Papers leak blew the lid on the murky world of industrial scale tax abuse. For over 40 years a single law firm, Mossack Fonseca, set up more than 200,000 shell companies for the rich and powerful, in places where their financial affairs could be cloaked in secrecy, out of reach from tax authorities and regulators. At the peak of its activity in 2005, Mossack Fonseca incorporated more than 13,000 companies -- that's one company every 10 minutes.

This is already a massive scandal and we have yet to find out the full extent of what the files contain. But the real shocker is that it is just a small part of a much bigger picture of tax evasion and avoidance that is costing governments -- including some of the world's poorest countries -- billions of dollars in tax revenues every year.

For a start Mossack Fonseca is not even the largest firm offering clandestine financial services. The company is a top-ranking firm by Panama standards, but is only the fourth biggest provider of offshore services globally.

Second, it's not just law firms that specialise in secretive financial manoeuvres which can be used to dodge taxes. The Panama Papers show that Mossack Fonseca worked with more than 14,000 banks, law firms, company incorporators and other middlemen -- almost 2,000 from the UK, 1,200 from Switzerland and more than 400 in Brazil.

More than 500 different banks including HSBC, Credit Suisse, and UBS registered shell companies with Fonseca. While earlier scandals, such as the 2014 Lux Leaks revelations, have highlighted the role of the accountancy firm PriceWaterhouseCoopers in securing secret deals from the Luxembourg authorities to drastically reduce their client's tax bills.

It is estimated that tax havens cost poor countries at least $170 billion in lost tax revenues each year.

Some, such as Singapore, specialise in secrecy allowing private individuals to hide their wealth and dodge paying their fair share of tax. Others, such as the Netherlands, offer corporations the ability to artificially reduce their tax on profits to almost zero. And they are doing a roaring business too -- in 2014, corporate investment in tax havens was almost four times bigger than it was in 2001.

The reality is that the Panama Papers, like Lux Leaks and Swiss Leaks before it, offer a small glimpse into a monster problem. This is not about one or two "bad apples." This is systematic abuse of an outdated and disjointed global tax system, that governments have largely turned a blind eye to for decades.

The implications are huge. When companies or wealthy individuals dodge taxes, governments either have to cut back on essential services, such as health care and education, or make up the shortfall by levying higher taxes on everyone else. Both options see the poorest people lose out and the inequality gap grow.

Poor countries are especially hard hit. It is estimated that tax havens cost poor countries at least $170 billion in lost tax revenues each year. The Panama Papers highlighted how just one company in Uganda used Mossack Fonseca services to try to avoid paying $400 million in tax. This is more than the Ugandan government spends on healthcare each year.

Oxfam's own research found that rich Africans' have $500 billion stashed away in tax havens -- depriving the continent of $14 billion a year in tax revenues. This is enough to save the lives of four million children and employ enough teachers to teach every African child.

It doesn't end there. Tax dodging companies have an unfair advantage over their tax paying competitors. Profit shifting and tax haven abuse mean that in OECD countries some multinationals use strategies that allow them to pay as little as five per cent in corporate taxes when smaller businesses are paying up to 30 per cent. While tax havens have spurred a race to the bottom that has seen corporate tax revenues -- and government revenues -- plummet in recent years. Since the financial crisis there has been a 20 per cent drop in corporate tax revenue in OECD countries.

Despite the enormity of the problem, it can be fixed. Recent financial sector regulation and rules on transparency (e.g. FATCA -- Foreign Account Tax Compliance act in the U.S. and the new EU rules) have already started to undermine the business model that has worked so well for Fonseca and others. These rules are nowhere near strong or comprehensive enough. But they do illustrate what can be achieved with political will.

Yet, given the globalised nature of this problem, even the strongest laws can only work if governments work together to tackle it. Otherwise, when rules are tightened in one country the tax dodgers will simply move their money elsewhere.

The leaked data shows this clearly. When the British Virgin Islands introduced new rules to prohibit bearer shares (a scheme which allows the people who own shares in a company to remain anonymous), the companies that used them disappeared from the island, only to reappear in Panama where they did not face the same level of regulation.

Whoever leaked the Panama Papers did the world a huge favour. He or she has shone a light on a murky global industry which can and must be dismantled. Government must now come together to agree the tough coordinated action that is needed to end the era of tax havens once and for all.

Click here to join Oxfam in calling on world leaders to end the end the era of tax havens so that we can end poverty.